January 31, 2008 – 2:00 am Going forward, I shall refer to the day on which I prepare my family’s tax return, which this year falls on January 30, as F*ck Milton Friedman Day.
Friedman, for all of his great contributions to economic theory and advocacy of the free market, was also instrumental in developing the Federal government’s most efficient means of confiscating the income of Americans with a minimum of protest: the withholding tax. Prior to the 1940s, citizens paid taxes in a lump sum every March. The 1913 tax act, which was adopted following the ratification of the 16th Amendment, originally called for withholding as well, but taxpayers expressed great displeasure at money being taken out of their pay envelopes before they even received them. The withholding provision was struck a few years later.
The problem with annual lump-sum payments is that it proved very difficult for the IRS to ensure it received all of the revenue that citizens were obligated to pay. Furthermore, it hampered the government’s ability to fund operations throughout the year. Imagine getting just one paycheck every year, covering your entire annual salary. You would likely budget your money very carefully to ensure it covered your expenses throughout the year. On the other hand, it would also give you the opportunity to invest some of that money so it could earn interest until you needed it to pay later expenses. In retrospect, that’s probably not a bad way for government to operate as well.
The Feds seemed to realize this, so to raise revenue during the year it sold “tax anticipation notes” to taxpayers to generate interest to help pay their tax bill the following year. This allowed taxpayers to meet their tax liability using less money than if they paid out-of-pocket when the bill came due.
With the country’s entrance into World War II, the government was faced with skyrocketing expenditures. Congress adjusted the tax rates from a heavily progressive system that mostly impacted the rich into more moderate brackets that imposed obligations on nearly everyone. Within three years following the attack on Pearl Harbor, the number of tax returns received by the IRS increased more than four-fold. Had the lump-sum payments continued, the entire system would have collapsed under the effort of ensuring tax obligations were met with every return. Withholding taxes at the source—by conscripting employers to serve as the government’s revenue agents—was the most effective method to protect the government’s revenue stream. In 1942, Friedman, then working in the Treasury Department, devised a new withholding plan. But the challenge of selling it to a public which had roundly rejected the previous scheme remained.
And like any good bureaucrats and politicians, they used the time-honored trick of snake-oil salesmen everywhere: they lied about it.
The key strategies used to obtain support for income tax withholding in 1943 all entailed political transaction-cost augmentation. Government officials artfully employed national defense language, tax-cost information, and promises of “tax forgiveness” to engineer support for a withholding system at root designed to enhance and protect government revenue for all times to come. The above-noted conflict between the government’s actual objectives and its publicly promoted objectives formed only one part of a systematic pattern of transaction-cost manipulation . . .
Treasury officials repeatedly testified to Congress that such withholding of income taxes–current collection at the source–represented “no additional tax.” On dozens of occasions, Treasury official Randolph Paul and other government spokesmen testified:
This collection at the source mechanism is nothing but a mechanism for collection. It is not an additional tax. … It merely speeds up the collection (U.S. House Hearings 1942, vol. 1: 100).
It should be kept in mind that collection at the source does not in itself increase or decrease the tax liability of the taxpayer (U.S. House Hearings 1943: 11).
Given the expert witnesses’ knowledge of present value, statements so seriously misleading to Congress and the public could not have been inadvertent.
Because it replaced interest-bearing notes with a pay-as-you-go system, the withholding tax did represent an additional tax on the public, by taking money before it even reached taxpayers’ pockets to be used by the government. Only when taxpayers filed their returns could they determine if they paid too little (and thus would have to send even more money to the IRS) or too much (and thus receive a refund, although the Treasury did initially suggest that interest be paid on any money returned). And with future dollars worth less than the present value of the money taken by the government, taxpayers would lose even more each year.
The Treasury Department acknowledged all this in hearings before Congress, yet insisted that withholding would not only impose no additional tax burden, but was merely a convenience for patriotic Americans to meet their obligations and support the war effort. And these same obfuscations were parroted by members of Congress during floor debates. Oppose such a sensible scheme, and you allow the Huns and Japs to win.
Sixty-five years later the government still gets its loot via the withholding tax, and despite many proposals to eliminate or at least greatly simplify the process, it remains the single greatest enabler of an ever-expanding state. As Murray Rothbard wrote about Friedman in 1971:
Only the Friedmanite withholding tax has permitted the government to use every employer as an unpaid tax collector, extracting the tax quietly and silently from each paycheck. In many ways, we have Milton Friedman to thank for the present monster Leviathan State in America.
Friedman did later express his regrets at helping bring about the withholding tax, as evidenced in this interview with reason’s Brian Doherty in 1995:
It was a very interesting and very challenging intellectual task. I played a significant role, no question about it, in introducing withholding. I think it’s a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war.
I have no apologies for it, but I really wish we hadn’t found it necessary and I wish there were some way of abolishing withholding now.
Yeah, me too. And while I stand to repatriate a significant chunk of my income from the Leviathan State this year, when I click the File button in TurboTax I’ll remember to honor the man who made it necessary in the first place: f*ck you, Milton Friedman.
A lot of people were outraged when 
Latest notable terms from this week’s 
filc
I must be missing something. I cannot get the source URL for the video. Can you provide a link please, I’d like to share this.
Published: October 10, 2009 6:31 PM
filc
On second thought I change my mind. I was going to send this to a left friend of mine but I don’t need to give him more ridiculous ammo. Though I would say there are some valuable points in this video.
Published: October 10, 2009 7:48 PM
Andrew_M_Garland
How can I have a right to bandwith? Is someone distributing bandwidth equally to everyone on earth?
Maybe Moglen means that I have a right to use a gun to threaten whomever I wish until they give me a certain amount of bandwidth. No, he couldn’t mean that.
Published: October 10, 2009 7:54 PM
Silas Barta
You’re … seriously surprised that someone else sees the IP and EM spectrum rights are closely related, and sink or swim together? You know, after I explained it to you nine or ten times?
Published: October 10, 2009 7:58 PM
newson
to stephan kinsella:
that fact that silas barta is fixated on the ip/em spectrum nexus should be a warning to you. wrong way, go back!
why on earth should i have a monopoly right to interference-free use of my transmitter to reach clients? If a neighbour uses his ham-radio on the same wavelength, does he cause me physical harm? no, he damages my business relationship with my listeners.
when the lone cobbler in town finds boots-are-us have opened in the mall, he is mightily pissed off. but has any aggression occurred to his person? or just his erstwhile cozy business model? there is no right to clients.
besides, this em scarcity thing seems contentious, even on a technical level. what about beaming signal via focused laser beam from one point to another? office-to-office streaming. this may not interfere with anyone else using the same frequency, unless they’re sharing the exact same corridor (and how many pencil-wide beams could you actually fit in a city?)
everybody is permitted to talk (audible transmission) at the same time by the law. good manners and etiquette dictate behaviour in group situations. no em laws needed, thank you very much. when my neighbour’s transmitter fries my gonads through his powerful transmission-tower (physical damage), i’ll see him in court to answer a plain-vanilla tort charge.
Published: October 10, 2009 9:41 PM
Silas Barta
Thanks, newson, exactly what I was hoping a Kinsella supporter would say.
I think my work here is done.
Published: October 11, 2009 12:17 AM
Stephan Kinsella
Silas, I’m glad to see that you are consistent and oppose both EM spectrum rights and IP rights.
Oh, wait–
Published: October 11, 2009 12:47 AM
newson
imagine i move to malibu beach (many years ago.) i buy a block some way back from the shoreline (mindful of spooky global climate change) and enjoy magnificent ocean views.
along come mickey rourke and kim basinger and build mansions in the beach strip in front of my house.
now i am really pissed off! the visible em spectrum that i was receiving from the breakers and the sand is now blocked by em transmission that i don’t want, mickey’s roof-tiles and kim’s air-con unit.
why didn’t i buy rights to the visible em spectrum before building? how could i have been so stupid? what folly! but i sure deserve compensation for the despoilment of my visible em reception. get my attorney on the phone, now!
Published: October 11, 2009 1:34 AM
Ribald
I find the IP debate interesting in many respects, such as the question of what form intellectual property takes in the free market.
For instance, a patent for “cars” is currently rejected because the idea is “too broad”, but is it any less worthy of protection just because it is broad? Should algorithms be patent-worthy? Living organisms? Is there a better way of determining who invented what than a government-created patent system? Is someone’s medical history or credit card number IP? How different does an invention have to be before it qualifies as distinct from someone else’s patent? Should it be a crime to illicitly copy and distribute IP, to profit from its use/sale, or both? Should IP exist only in the abstract, as something which we are willing to pay a price to protect, but which it is legal to acquire and share (free speech), regardless of who “owns” it, or should it exist in the same manner of property rights that cover tangible goods?
Do free market principles tell us the answers to these questions, or do we have to accept a mutual consensus?
Published: October 11, 2009 5:39 AM
Martin OB
In my opinion, the EM spectrum should be regulated as a form of acceptable noise levels, just like with sound.
Everyone should have the right to emit whatever EM frequencies he likes in his own property, and to receive a low enough EM radiation level from his neighbors. How low is enough? That’s analogous to the question of sonic noise levels. They’ll have to agree on some acceptable level.
Then, if you want to set up a radio station, you ask your neighbors for permission to “pollute” their property with your EM radiation. If your radio station is good, they may let you for free. Otherwise you may have to pay.
This should be the default procedure. Private fenced communities could, of course, have more conventional internal EM regulations.
So, I’m very close to newson’s last paragraph (EM is like talking), except I don’t see why you should have to wait until your neighbor “fries your gonads”.
If you have some very sensitive equipment and your neighbor sends a cute little EMP, even if it doesn’t harm your body, you arguably have a right to complain about the damage to your property. And what if he doesn’t actually destroy your equipment, but he renders it useless because of constant, massive EM noise? You have spent money in your equipment and now you can’t use it because of your EM-noisy neighbor sending his EM noise into your property.
On the other hand, it may be the case that you build an *extremely* sensitive piece of equipment with no EM insulation, and then you neighbor buys an electric lawnmower which damages your equipment. It may be reasonable for you to complain about that, but it’s also reasonable for him to claim he has a right to use an electric lawnmower in his property. So, tort law may be a solution, but only if jurisprudence or implicit agreement is already present about what EM noise levels are reasonable.
This is NOT the same as what happens with the lone cobbler, because in this case, as newson says, no property of his is damaged. His clients are not his property.
Notice, by the way, that it’s not the radio station owner who has a right to complain about interference; it’s the radio listeners. Why? because the radio station is not prevented from emitting its EM radiation; it’s the radio receivers who are prevented from using it. Of course, the radio station owner could buy a radio receiver and complain as a listener of himself, but he couldn’t seek reparations for his lost audience.
I think it’s pretty clear this is nothing like IP. It’s just a tricky aspect of (physical) property rights.
Published: October 11, 2009 6:24 PM
newson
i concur with martin ob, whose reply is more nuanced and articulated than mine.
Published: October 11, 2009 11:57 PM
NateS
As an electrical engineer and having taken many classes on electromagnetic communication, in my opinion the EM spectrum can transmit a nearly unlimited amount of information, far beyond any problems imposed in our current world.
If some jerk rings a gong, then in the future I will be more precise about the timing of my gongs. I will ring twice, I will ring in the note of E, I have a nearly infinite number of permutations for him to try and preempt. The interferer will always have to imitate a previous signal and thus will lack the ability to interpret the packet of information explaining when future gong will ring, how many times it will ring, at what tone, etc. etc.
Then you have the problem of determining the actual economic viability of interfering with someone else’s signal. The sophistication needed to beat even the most rudimentary encryption efforts would far outstrip any usefulness in a market.
The example of the EM spectrum seems like a worse than acceptable justification for IP.
Published: October 12, 2009 12:00 AM
Stephan Kinsella
NateS: “As an electrical engineer and having taken many classes on electromagnetic communication, in my opinion the EM spectrum can transmit a nearly unlimited amount of information, far beyond any problems imposed in our current world.”
As an electrical engineer also, I disagree. Of course the EM spectrum and bandwidth is finite. In any event, “nearly unlimited” is not unlimited, meaning there is scarcity.
but this is not about the EM spectrum. That is an independent problem. The IP issue is easy. EM spectrum rights are not so clear. I lean to the view that these rights are justified, as explained in “Why Airwaves (Electromagnetic Spectra) Are (Arguably) Property.”
Published: October 12, 2009 1:18 AM
NateS
What would stop me from homesteading the entire spectra?
You are essentially building a model for which someone could actually impede and block all development in the EM spectrum by claiming they were there first.
Easements are a result of imperfectly applied property rights, and public property, a weak justification for creating arbitrary property rights over things that are being given away (energy signals).
Published: October 12, 2009 1:28 AM
R.P. McCosker
“[B]oth conservative and libertarian IP advocates, and leftist IP opponents, all accept the idea that IP is a type of property right. The leftists oppose IP for this reason–because they are opposed to private property rights; and the libertarians favor IP because they are proponets of property rights.”
Interesting parallel here to anarchism: Some favor it as a way to abolish private property, and others favor it as a way to uphold property. (Which reminds me: Anarchism can only function within some kind of social framework. Surely that framework must be considered a political system of sorts.)
From a propertarian-libertarian perspective, IP is ethically wrong because, by definition, operates by confiscating certain uses of extant tangible property. And as time passes more and more uses of one’s extant property are seized by the coercive agency of government and redistributed to IP “holders.” Anti-IP collectivists don’t get that IP doesn’t create private property, but rather redistributes it, when what they really want to do is abolish it altogether.
Published: October 12, 2009 12:08 PM
Michael A. Clem
What would stop me from homesteading the entire spectra?
Well, for one thing, it would take a whole heck of a lot of transmission power to transmit over the entire spectra, unless you’re specifically limiting it to a very short range. What’s the economic incentive for doing that? How would it be profitable?
Published: October 12, 2009 1:39 PM
kmeisthax
I find it hilarious that we’re trying to justify property rights to emit something that violates other people’s property.
Better idea: you can emit what you want so long as no one else is harmed and complains.
If someone complains that your emissions are disabling their rightful use of their land, or them being able to hear other frequencies, they have a right to complain and you have a moral imperative to stop transmitting. Why? Because your emissions are trespassing -their- land.
If you are interfering with an active transmission of someone else’s, others are also allowed to complain about your interference, and you must attenuate your signal until it is no longer invading their land. It’s the same as dealing with regular noise pollution.
Published: October 12, 2009 4:58 PM
Martin OB
kmeisthax:
Welcome to the club. There’s at least three of us here 😀
Published: October 12, 2009 7:02 PM
Vanmind
“Anarchism can only function within some kind of social framework. Surely that framework must be considered a political system of sorts.”
I don’t think anarchic is meant to imply apolitical. Rather, I think it’s meant to imply that no pretense of rule-over-it-all is to be tolerated. Politics & disputes are still resolvable under anarchy, just in different ways that resort less to coercion by way of such rule-over-it-all pretense.
Published: October 12, 2009 9:51 PM